Two days ago I checked the valuations for Vanguard's large blend indexes. US stocks have currently higher valuations (higher PE ratio) than the rest of the world, meaning that US stocks have smaller expected returns.

The average PE ratio for SP500 in last 90 years was 15.8. PE ratio, however, rose to 40 in 1929 and to 70
in 2007. While there is still space for US bubble to grow even more, I wonder, weather it is prudent to transfer some
money (from 1/3 to 1/2) outside USA?

I think it is rational to move a portion of your US Stock monies to International Stock but I wouldn't overdo it. In other words, don't abandon the United States. My best guess is that such a move might be 10%, 15% or even 20% of your total portfolio. The market is not irrational, the US commands higher P/E's for pretty good reasons. Pretty much, during the last financial crisis, the US was the cleanest dirty shirt in the laundry hamper. Another way of saying it is that the US was regarded as a safe haven.

What I have recommended to others here is between a 20% and a 50% percent allocation of your stocks to International. I am at about 27% now but there is no magic number. Vanguard recommends 40%.

things change, and the US is slowly but surely losing it's footing as "the world leader"

rather than continuing to add to total us, I've been sweeping my monthly money into vanguard and plan on buying admiral shares of the total int'l for my taxable ... I'll be around 65/35 US/Int'l at that point ... from there I will just continue buying the cheaper of the 2

*either there will be a correction in US by the time I have the 10K, or it's going to US. I have no confidence in continuing to dump money into the US at current valuations ... sort of bitter sweet watching my money go up, and yet feeling no confidence whatsoever in buying up more at the moment ...

by September I'll be either DCA'ing into US or it's Total Int'l. My Total Int'l in Roth has doubled what the total US has earned in 2017 ...

It's time ONLY if you have done the research and decided to change your asset allocation going forward based on your research and risk tolerance. It is not time if you are just speculating on which will rise faster. Or bid up international (I've had a significant international allocation for my whole investing career) and make me more money

Very roughly, as I don't want to dig through the precise numbers, I've personally been about 20% in international stock and 80% in U.S. stock since the mid-1990s. According to Portfolio Visualizer, the overall result of that 20% allocation, compared to having been 100%, has been to reduce my return the stock part of my portfolio from a CAGR of 8.09% to 7.56%, make virtually no change in risk-as-measured-by-standard-deviation from 15.54% to 15.52%, and thus very slightly reduce my risk-adjusted return from a Sharpe ratio of 0.45 to 0.42.

It has basically made no difference at all. The tiny differences it has made have all been very slightly unfavorable. Notably, the supposed "diversification" benefit of international stocks was not seen during this time period.

Last edited by nisiprius on Sat Jul 15, 2017 5:22 pm, edited 1 time in total.

tibbitts wrote:Well if it's time now, it was a better time a while back before international had a big run and everybody else noticed. Whether it will continue, nobody knows.

I am waiting for the "What the heck do we need US Stocks for anyway?" threads to pop up as the International markets start to do better. Much of this has to do with the relative strength of the US Dollar to other major currencies such as the Yen, the Euro, and the Pound. The underperformance of the International markets has much to do with a very strong US Dollar. The Dollar weakened a bit this year and that has helped International Stocks. Let's see if this trend continues.

nedsaid wrote:I am waiting for the "What the heck do we need US Stocks for anyway?" threads to pop up as the International markets start to do better. Much of this has to do with the relative strength of the US Dollar to other major currencies such as the Yen, the Euro, and the Pound. The under-performance of the International markets has much to do with a very strong US Dollar. The Dollar weakened a bit this year and that has helped International Stocks. Let's see if this trend continues.

I'm not much into market timing, but do worry about currencies due to living in Europe. Looking at USD vs EUR since the 80s, it is very striking how on average they are in line with PPP in spite of major swings. The latest Economist Big Mac results just came out, and I think it's indeed fair to say that the USD is strong and will probably weaken over the next 5 - 10 years. That is a reason in my mind to be overweight in International. I overweight International when the USD is strong, and vice versa. But, honestly, over a 30+ year time horizon I doubt it will make an enormous difference.

I have been Market weight International for a while now, since I settled on a final asset allocation following much reading. I'm pleasantly surprised at how lucky my timing was, given most of my purchases preceded last December. However what matters is how global equities perform over the next 50 years, not next year.

I'm not planning on changing anything

"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

I have retained my % of foreign stock index funds from the lows of years past to the great year of 2017. I am getting ready to invest more cash, but will keep the original foreign allocation as my plan calls for "staying the course" unless I can prove "this time is different".

Good Luck to you,

Dan

The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” |
— Warren Buffett

I think the "is now time to move" question should be answered by the rebalancing policy that hopefully you've written down prior to this time. I understand domestic stocks have done really well versus foreign for 5 years or so. That's what accounts for the difference in valuation metrics you note. So it could have well been appropriate over the last year or so to move a bit of investment from domestic to foreign to maintain whatever allocation balance you had previously decided was appropriate.

To paraphrase (badly) an old Zen koan: the best time to move into international stocks was when your asset allocation in your IPS said that this was the right long term allocation for you. The second best time is today (if indeed your IPS says that's your long term allocation).

Very roughly, as I don't want to dig through the precise numbers, I've personally been about 20% in international stock and 80% in U.S. stock since the mid-1990s. According to Portfolio Visualizer, the overall result of that 20% allocation, compared to having been 100%, has been to reduce my return the stock part of my portfolio from a CAGR of 8.09% to 7.56%, make virtually no change in risk-as-measured-by-standard-deviation from 15.54% to 15.52%, and thus very slightly reduce my risk-adjusted return from a Sharpe ratio of 0.45 to 0.42.

It has basically made no difference at all. The tiny differences it has made have all been very slightly unfavorable. Notably, the supposed "diversification" benefit of international stocks was not seen during this time period.

In what world does a 0.5% difference in CAGR over 20 years "basically make no difference at all"?

Many recent posts have discussed Sharpe's theory of holding a world market capitalization portfolio. That along with the recent performance of international funds probably has many investors examining the international exposure in their portfolios. My portfolio is really light on internationals according to Sharpe. I need to rebalance into more international. The question is how much international do I want. My investment plan is not close to a world market capitalization portfolio. I will probably rebalance using new money and will remain light on internationals.

Many US companies do vast amounts of international business, and many International companies do business outside of their home country. Investing in large US companies results in investing in global economic growth.

It is very complex, and some of the difference in domestic vs international PE is due to market expectations about geopolitical risk and monetary trends. For example - the PE delta may reflect expectations for the dollar to strengthen vs foreign currencies; what lower PE gives you in higher expected returns may get taken away by poor future exchange rates. International's lower PEs (and higher expected returns) reflect higher expected risk (volatility) as well.

There ain't no such thing as a free lunch. Pick an allocation you can stick with over the long haul, and stick with it over the long haul.

nedsaid wrote:I am waiting for the "What the heck do we need US Stocks for anyway?" threads to pop up as the International markets start to do better. Much of this has to do with the relative strength of the US Dollar to other major currencies such as the Yen, the Euro, and the Pound. The under-performance of the International markets has much to do with a very strong US Dollar. The Dollar weakened a bit this year and that has helped International Stocks. Let's see if this trend continues.

I'm not much into market timing, but do worry about currencies due to living in Europe. Looking at USD vs EUR since the 80s, it is very striking how on average they are in line with PPP in spite of major swings. The latest Economist Big Mac results just came out, and I think it's indeed fair to say that the USD is strong and will probably weaken over the next 5 - 10 years. That is a reason in my mind to be overweight in International. I overweight International when the USD is strong, and vice versa. But, honestly, over a 30+ year time horizon I doubt it will make an enormous difference.

Over time, the effect of relative currency valuations of the dollar vs. other major currencies should about even themselves out. I don't advocate strategic shifts in asset allocation except for rare occasions. Right now, the combination of a strong US Dollar, years of International underperformance vs. the US, and significant values in International markets compared to the US; suggest it is a good time to shift some funds from US to International.

Again, do not abandon US Stocks. And again, do not overdue shifts. Probably a shift equal to 10% of your total portfolio would do it, my maximum shift would be 20% of the total portfolio. I do not recommend committing any more than 50% of your stock allocation to International. Vanguard recommends 40%. So if your allocation of stocks to International is 30%, it might be a good time to shift to 40% or even 50%.

Another thing that I would emphasize is that these shifts should be rare, not an on the hour, every hour type of thing. A type of shift like this should be considered maybe once or at most twice in a decade, and even then with a lot of thought. It is my opinion that the current situation fits my criteria.

I'm sympathetic to the notion that right now seems like a good time to increase international weightings, but I'm not going to really advocate it, as I haven't even convinced myself this sort of very high level market timing is a good idea.

I will say more confidently it's a bad idea if you're thinking of doing it speculatively to see how it works out. That kind of logic can lead investors to change investment strategies mid-course when the results aren't as expected. You're sort of setting yourself up for a decision to "sell low."

+1 for this, well worth a read:https://www.economist.com/news/finance- ... l-americas
Why I index: There is no way that I would have stock-picked early the low-profit US internet titans of today, like Google, Amazon, etc. I have always relied on visible profits for my individual picks. But indexing has enabled all of us BHs to be satisfactorily exposed to these (possibly ephemeral?) low profit/high growth now-titans. Recall that our exposure to Yahoo and Netscape has also been curtailed in a reasonably timely fashion because of indexing. Not all that shoots up stays up in orbit. Similarly indexing has enabled people to steadily dump Japan as its weighting diminished. My conclusion? I will index all my stocks portfolio worldwide. I do not have to worry about whether the US is way over-represented in a world index vs-a-vis its GDP, or whether Taiwan or S. Korea is under-represented. As the world indices get rebalanced every quarter or whatever, I am automatically rebalancing following the combined opinions of all the world's market players. Index and relax... That's the BH way. My way: Index worldwide and relax...

The prospect of US and international having a higher correlation (alluded to above) going forward causes me to be even *more* interested in a global cap weight: let the market decide how much I own from any given country.

Many large US companies have significant international operations, so US stock markets are already somewhat international. Emerging markets seem riskier to me, and Europe has Brexit, PIGS, and diversity problems. If I were young or a billionaire, I'd be happy to gamble on international stocks because you can really win big when you are not losing big. Since I'm old and not a billionaire, I was concerned when Vanguard upped the percentage of international holdings in their target retirement funds at the beginning of 2015. I converted the target retirement funds to roughly the same mix of US funds, but dropped the international and TIPS portions. Now I have to do my own rebalancing, but I sleep better.

Global market is around 50/50 US, give or take - has been for years. If you know better than the total market, tilt away (or toward or whatever)! If you don't (hint: you don't) maybe start with something like that, which, incidentally, is pretty neutral (no temptation to add or subtract a bit and market time). Works for me and is pretty future-proof too.

"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

PaFromFL wrote:Many large US companies have significant international operations, so US stock markets are already somewhat international. Emerging markets seem riskier to me, and Europe has Brexit, PIGS, and diversity problems. If I were young or a billionaire, I'd be happy to gamble on international stocks because you can really win big when you are not losing big. Since I'm old and not a billionaire, I was concerned when Vanguard upped the percentage of international holdings in their target retirement funds at the beginning of 2015. I converted the target retirement funds to roughly the same mix of US funds, but dropped the international and TIPS portions. Now I have to do my own rebalancing, but I sleep better.

Gawd every time I hear this argument ... ugh ... but whatever. Let's break it down for the zillionth time:

(1) If US companies have significant ex-US exposure, guess what - the same works in reverse. Argument null and void.

(2) If international stocks are riskier (I don't buy it, but the argument is long) then great, you should expect higher returns.

(3) You mention a bunch of international worries, but like, a lot of crazy stuff is going on in the US too, which I can't go into.

tibbitts wrote:Well if it's time now, it was a better time a while back before international had a big run and everybody else noticed. Whether it will continue, nobody knows.

I am waiting for the "What the heck do we need US Stocks for anyway?" threads to pop up as the International markets start to do better. Much of this has to do with the relative strength of the US Dollar to other major currencies such as the Yen, the Euro, and the Pound. The underperformance of the International markets has much to do with a very strong US Dollar. The Dollar weakened a bit this year and that has helped International Stocks. Let's see if this trend continues.

So true. Next post will be flipping the us-international. Instead of 80/20 stock it will be 20/80 stocks. It will be because now internationals are doing better.

I have ask here and 20% internationals seem good by many. But many state you need more. But than I see the pros at Vanguard tell you need more when you look at their Target Dated Fund or Lifestyle Funds.

indexonlyplease wrote:Ever book or blog I read nobody has success timing the market. So why do people still do it??

Indexonlyplease,

In some extreme situations it may make sense to change portfolio allocations because of valuations.

For example, around January 2000 if you calculated expected return of the US stock market by adding dividend yield and expected growth, you would have found that 30 year TIPS had a significantly higher expected return.

Similar for Japanese stocks vs ex-Japan stocks around January 1990.

Is the expected return difference today between US stocks and ex-US stocks extreme enough to justify changing our allocation? To me it is.

indexonlyplease wrote:
I have ask here and 20% internationals seem good by many.

When Personal Capital reviewed my portfolio, they recommended 30% international equities. Vanguard recommends 30% to 50%. Based on that, your 20% seems light if you are looking for validation by others.

indexonlyplease wrote:
I have ask here and 20% internationals seem good by many.

When Personal Capital reviewed my portfolio, they recommended 30% international equities. Vanguard recommends 30% to 50%. Based on that, your 20% seems light if you are looking for validation by others.

Disclosure: I own almost no international equity.

Just wondering. Is stating you need more international now like stating this you neeed more small cap or REIT. Even better more value fund indexes??

But then again, the best way I would state more internationals is just by looking at the Vanguard Target funds or Lifestyle funds. They do believe in a higher % of your portfolio should be in international. I belive around 40%

PaFromFL wrote:Many large US companies have significant international operations, so US stock markets are already somewhat international. Emerging markets seem riskier to me, and Europe has Brexit, PIGS, and diversity problems. If I were young or a billionaire, I'd be happy to gamble on international stocks because you can really win big when you are not losing big. Since I'm old and not a billionaire, I was concerned when Vanguard upped the percentage of international holdings in their target retirement funds at the beginning of 2015. I converted the target retirement funds to roughly the same mix of US funds, but dropped the international and TIPS portions. Now I have to do my own rebalancing, but I sleep better.

Gawd every time I hear this argument ... ugh ... but whatever. Let's break it down for the zillionth time:

(1) If US companies have significant ex-US exposure, guess what - the same works in reverse. Argument null and void.

(2) If international stocks are riskier (I don't buy it, but the argument is long) then great, you should expect higher returns.

(3) You mention a bunch of international worries, but like, a lot of crazy stuff is going on in the US too, which I can't go into.

stemikger wrote:Nothing changes on my end. I don't own any international stocks or bonds. A simple two fund all U.S. 60/40 portfolio or one fund Vanguard Balanced Index Fund is all you need.

Stay the Course and keep it Simple!!

Vanguard Total World Stock + Total Bond Market is as simple or simpler.

The main reason I don't hold that fund is the silly higher expense ratio (partly through lack of Admiral shares) than holding Total US and Total International separately. It makes no sense as far as I can tell, but it is what it is.

"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe